Markets expect the Fed to raise rates in December after inflation exceeds forecasts

The Treasury selloff now looks less like a one-day jobs shock than a repricing of Fed patience with inflation. Deloitte said in a Nov. 9 weekly update that October payrolls added 165,000 jobs, bigger than analysts expected, while UBS said federal funds futures markets now price 28bps of hikes for December.

The repricing reaches beyond trading screens because the same reports point to higher home financing costs and a harder setup for long bonds. Mortgage rates had been falling, according to HousingWire, and UBS was already cautious on the longest maturities. A move priced in futures could put renewed pressure on mortgage rates and long bonds before the Fed votes.

Briefs reported on Nov. 11 that after October CPI and core CPI topped forecasts, markets fully priced a quarter-point Fed hike for December. Treasury contracts also fell, pointing to a 2 to 4 basis point lift in yields when trading reopens, Briefs reported.

Business Times reported this week that CPI data and Waller's comments drove a powerful sell-off in the US Treasury market. The yield on two-year notes, a proxy for Fed policy expectations, rose by the most since early April 2025. That points to a market arguing about the policy rate, not only the economy's speed.

The accounts did not line up perfectly on levels, but they agreed on direction. Biggo said this week that the Treasury yield more sensitive to the policy rate was at 4.6% and the longer note was about 4.884%, both edging higher. Another Biggo item said the policy-sensitive yield jumped to around 4.73%, while the dollar strengthened and gold and stock-index futures fell.

Kansas City Fed President Jeffrey Schmid offered a policy argument for higher rates, saying the current rate level remains "quite accommodative," with businesses in his district reporting strong demand and inflation still the top concern, Biggo reported this week. That language gives investors less reason to expect quick relief from the central bank.

BeiChen Lin, senior investment strategist at Russell Investments, said after a strong jobs report and other data showing economic resilience, the Fed will have little patience for inflation, Biggo reported this week. That comment joins the employment and price evidence in one trade: yields can stay under pressure even if wages do not validate an overheating story.

Wages Did Not Join

Deloitte's labor detail keeps the move from being a simple wage scare. The same weekly update said that despite the strength of the job market, wage growth has not accelerated. If pay is not speeding up, the case for higher yields rests more on inflation persistence and Fed reaction than on a classic spiral from hiring to wages.

The labor reading still earns a concession. Deloitte said job growth was the third-strongest monthly rate recorded this year, and Lin cited a strong jobs report alongside other data showing economic resilience. A pure growth interpretation therefore has evidence behind it; it loses force only because the same labor summary says wage growth failed to accelerate.

Inflation gives the larger clue. Briefs said CPI and core CPI topped forecasts, and Business Times said CPI data and Waller's comments drove the Treasury sell-off. On those reports, the market reaction was a bet on a less patient Fed rather than a straight celebration of hiring strength.

Mortgage borrowers face the quickest household transmission. HousingWire quoted Jake Krimmel saying the 10-year Treasury was up nine basis points just 25 minutes after the CPI report; HousingWire also said rising Treasury yields and speculation about hikes early next year could reverse the recent rate decline. That would turn a short relief window into renewed pressure on mortgage pricing.

Holders of long Treasury maturities carry the less forgiving side of the move. UBS said it favors quality short- and medium-maturity bonds while remaining cautious on the longest maturities because of persistent fiscal deficits and heavy Treasury issuance. If yields keep rising, price losses would land harder where maturities are longest.

The cross-market message was already visible outside bonds. Biggo said the dollar strengthened while gold and Nasdaq 100 futures fell, which leaves gold holdings and stock-index futures exposed to the same repricing. If the next data lower the priced tightening path, those assets would regain room from a softer rate signal.

Before the Fed's December meeting, at least one more jobs report and several inflation readings will arrive, and officials' remarks will keep shaping how markets price the tightening path, Biggo reported this week. Futures that keep a full hike in the price would confirm policy repricing; lower priced hikes would weaken that reading.

What would change it. Futures pull the December hike out of the price after the next jobs and inflation releases.